Companies surrender too easily to
activists

Oct 5, 2014 : Companies under siege from
activist investors are surrendering too easily, according to
Ken Moelis, the investment banker, whose advisory firm has
represented some of the most prominent activists

Companies under siege from activist investors are surrendering too
easily, according to Ken Moelis, the investment banker, whose advisory
firm has represented some of the most prominent activists.

After a week in which
Ebay acceded to the demands of
Carl Icahn, the veteran activist, and agreed to spin off its PayPal
unit, Mr Moelis said advisers to such companies were relying on old
and ineffective strategies, likening them to “the Maginot line”, the
doomed French defence which was bypassed by Nazi invaders in the
second world war.

“You put up an expensive wall with gun turrets and the activists end
up going around it,” he told the Financial Times. “I think there is a
lot of room to be more inventive and more aggressive in the process.”

Moelis & Co, which Mr Moelis took public this year, represented
Herbalife, the seller of nutritional supplements, in its fight with
Bill Ackman, the hedge fund investor, who has shorted the stock and
accused the company of operating a pyramid scheme.
Herbalife has denied Mr
Ackman’s allegations.

In an unusual move during that battle, Moelis approached investors in
Mr Ackman’s fund, Pershing Square Capital Management, to argue that
the hedge fund could be making a costly mistake.

But Moelis has also represented activists, such as Starboard Value, an
activist investor, which urged
Smithfield Foods to break
itself up.

Mr Moelis argued that companies which give in to activists’ demands,
such as the right to appoint board members or a large share buyback,
were mistaken and being given bad advice from banks mounting the
defence.

“People are addressing these things as if they’re up against some
force that has powers. They are not. They are up against human beings
with probably more weaknesses than your company has. I’m looking
forward to some people entering the fight with the idea they can win.”

He questioned whether clients of the large banks were able to overcome
potential conflicts given the lucrative trading commissions and prime
brokerage fees they made from some hedge fund activists. “Can you
really fight an activist using the full range of options if you are
their prime broker or if they are a very large client of your equities
division?” he said.

Mr Moelis is unlikely to attract the attention of activist
shareholders at his company – even after going public in April –
because he used the controversial ploy of holding shares with higher
voting rights, which gives him control despite only owning a third of
the company.

}
You put up an expensive wall with gun turrets and the activists
end up going around it. I think there is a lot of room to be
more inventive and more aggressive in the process ~

- Ken Moelis

The initial public offering fell short of the proposed range. Mr
Moelis said that was due to circumstances outside the company’s
control, such as “a slight invasion of Ukraine”, which spooked
investors.

But he said he never considered delaying the share sale: “These firms
are all about momentum, zeitgeist and atmosphere – and the atmosphere
was ‘let’s get this done’.” Shares in Moelis, which listed at $25,
closed last week at $34.36, valuing it at $1.9bn. Moelis has enjoyed
the pick-up in deal activity.

Mr Moelis took an uncompromising view of one element of the
strong M&A environment: the
spate of “tax
inversion” deals done by American companies, which acquire
a company in a different country in order to relocate their
headquarters and pay lower taxes.

Mr Moelis, who recently hired the former Republican politician Eric
Cantor, said the Obama administration was taking the wrong approach by
trying to discourage the deals. “I think what’s going on in the
government right now is an attempt to make enough noise and create
enough controversy that you tip the scales just a little bit toward
uncertainty.”

He said: “The United States should be the leading capitalist force in
the world. We should cut our corporate tax rate.”

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